Gazprom Sets Its Sights on Georgia

With parliamentary elections slated for the fall, Georgia’s ruling party is hoping that low energy prices will ensure victory at the polls. Once relatively independent of Gazprom, the government in Tbilisi is weighing importing natural gas from the Russian energy giant

Relations with Russia have again become a central issue in Georgian politics in the run-up to October’s parliamentary elections. United National Movement, the opposition party that former president Mikheil Saakashvili leads despite living in Ukraine and no longer holding Georgian citizenship, has given the government an ultimatum: disclose information about negotiations with Russian gas monopoly Gazprom or face mass protests. A deal, the opposition argues, will “irreparably damage national interests.”

Opposition leaders have maligned the talks so much that one might think officials are engaging in state treason rather than negotiations with a foreign company. Of course, Georgia and Russia do not have an ordinary relationship: Tbilisi maintains that 20 percent of Georgia’s territory is under Russian occupation, and the two countries have not had diplomatic relations since the Russo-Georgian War of 2008. Those who oppose any deal with Gazprom emphasize that the energy giant is not simply a joint-stock company, but rather a state-owned monopoly and one of the Kremlin’s strongest geopolitical tools, particularly in the former Soviet republics.

This point is hard to argue with, though Saakashvili’s party doesn’t exactly have the moral authority to blame the ruling Georgian Dream party. So far, the negotiations haven’t led to any concrete agreements. However, back in December 2008, just a few months after the Russo-Georgian War, Saakashvili’s team had no qualms about signing a secret memorandum of intent with Inter RAO UES that put the Russian energy company in charge of managing the Inguri hydroelectric power plant, the largest in the Caucasus. (The memorandum was never published and the plans fell through because the government of Abkhazia objected.)

Gazprom Takes the Lead

The current Georgian government agreed to negotiate with Gazprom because of an ongoing natural gas delivery crisis. Azerbaijan is Georgia’s main supplier of natural gas, with about 3 million cubic meters coming in per day from the Shah-Deniz deposit. Part of this supply is provided as payment for transit rights through Georgia, and the rest is sold at a heavily discounted rate. Georgia buys another 6 million cubic meters per day at an equally favorable rate from Azerbaijan’s state oil company, SOCAR. The weighted average price of Azeri gas at the Georgian-Azerbaijani border did not exceed $140 per 1,000 cubic meters even when global energy prices peaked.

Georgia has not purchased any substantial amount of Russian gas since 2006 (excluding agreements concluded by individual private enterprises), although the country’s energy system does receive about 2.5 million cubic meters of Russian gas per day in exchange for the right to send gas through Georgia to Armenia. According to Georgian Energy Minister Kakha Kaladze, gas consumption has been rising by about 400 million cubic meters per year and now totals about 2.5 billion cubic meters annually. This figure is expected to rise another 15 to 20 percent over the next year or two. Georgia is going to need more gas.

Tbilisi turned to Baku first to discuss increasing gas import volumes. During an official visit to Georgia, Azeri President Ilham Aliyev promised that his country had enough gas to supply Georgia, Turkey, and all of Europe for the next 100 years. But Tbilisi, which has become accustomed to preferential rates, is more concerned about cost than about quantity. The question is: will Azerbaijan deliver additional gas at the rates agreed on in 2006?

Enter Gazprom. Alexey Miller, the company’s CEO, invited Kaladze to meet in Brussels in September, and they have met twice since then. Officially, the talks only concerned moving to a cash (rather than gas) compensation scheme to pay for the transit of Russian gas through Georgia to Armenia. Gazprom hinted that if Georgia did not agree to monetization, Russia would stop all transit and instead ship gas to Armenia from Iran through its own pipeline. Most Georgian experts think Gazprom is bluffing, as it would not make business sense for Gazprom to exit the energy market in the Southern Caucasus; inviting a strategic competitor (Iran) would be an even bigger mistake. Kaladze has already admitted that the discussion over monetization segued into broader talks about buying additional gas from Russia. According to him, Moscow is offering a better price than Baku.

The leaders of the ruling coalition maintain that there is nothing wrong with buying gas from multiple suppliers. Nonetheless, the opposition plans to use the issue in its campaign in the lead-up to the parliamentary elections, which will decide the makeup of the next government in Tbilisi, as Georgia is a parliamentary republic.

The Stakes

Considering that Russian state companies are careful to make sure that all of their important decisions are in line with the Kremlin’s strategic aims, Gazprom’s motivations for gaining a foothold in Georgia are obvious. Georgia’s strategic position in the Southern Caucasus will be useful in talks with other major players in the regional energy market, namely Azerbaijan, Iran, and Turkey.

Gazprom can take advantage of the Georgian government’s desire to keep prices low; raising tariffs in an election year would be political suicide for Georgian Dream. In doing so, Gazprom will attempt to establish contacts and gain influence with local elites, and fuel tension between the government and the opposition. This tension could spur Georgian Dream to take riskier steps resulting in greater reliance on Moscow, despite Tbilisi’s stated ambition to pursue Euro-Atlantic integration. Gaining a foothold in Georgia may be relatively cost-effective for Gazprom: because of the downward trend in global energy prices, the company may be able to offer Georgia low-cost gas without sacrificing significant profits.